ACC 542 – Chapt 7 & 8 and 9 Homework

ACC 542 – Chapt 7 & 8 Required Homework

Hill Bikes Unlimited uses a flexible budget
and standard costs to aid planning and control of its bicycle production. You recently accepted a position with Hill
Bikes and as part of your duties, you must review the variances and make a
presentation to the company’s executive committee (which is not made up of
trained accountants).

As in the real world, sometimes things
happen. Assume that the material you
prepared was placed on top of some papers going into the shredder. (You know where this story is going…..) After you realize your mistake, you rush into
the shredding room to find that some of your pages and data have been shredded. This is all that is left:

Standard or budgeted costs and quantities:
Direct
materials 2.0 meters of aluminum
at $16 per meter
Direct
labor 2 hours at $15 per
hour
Variable
OH Based on DL hrs, the
standard or budgeted VOH rate is $9
Fixed
OH Based on DL hrs, the
standard or budgeted FOH rate is $23

Total Costs allowed for the actual quantity
of output (flexible budget)
Direct
Materials $608,000
Direct
Labor $570,000
Variable
OH $342,000

Variances Price
(or spending) variance Efficiency
variance
Direct
Materials $25,000
Fav $ 32,000 Unfav
Direct
Labor $30,000
Unf $30,000 Unfav
Variable
OH $8,000
Fav ????
Fixed
OH $6,000
Fav ????

Direct
Materials price var per meter = $0.50 Fav

The
Budgeted quantity of bikes is 20,000 units.

Given
that you presentation is coming up soon, prepare a variance analysis using the
4-way chart / table (see attached template). Be sure to complete all totals along with the
variances clearly marked as unfav or fav.
Submit that template along with answers to the following questions.

1.
What was the actual quantity of
bikes produced?
2.
How many meters of direct
materials were actually purchased? (Hint: Use the variance and your knowledge
of the budgeted price for materials to solve for actual price; then solve for
the quantity.)
3.
Is VOH underapplied or
overapplied? By how much? Is FOH underapplied or overapplied? By how much?

4.
Explain the Production volume
variance (PVV)?
5.
Identify at least 3 of the
variances (not the PVV) and explain to the executive board what the variances
indicate. How is the firm doing?

Chpt 7 & 8
HW

Actual

Flexible
Budget

OH
Applied
(This
column only for OH)

Dir Mat

(AQI
x AP)

(AQI
x BP)

( x )

(AQI
x BP)

( x )

[(AQO
x BQI) x BP]

Dir Lab

(AQI
x AP)

( x )

(AQI
x BP)

( x )

[(AQO
x BQI) x BP]

VOH

QI= how we ‘apply’ OH

(AQI
x AP)
Actual

(AQI
x BP)

[(AQO
x BQI) x BP]

Applied
[(AQO
x BQI) x BP]

FOH

QI= how we ‘apply’ OH

Actual

Master
Budget

Flexible
Budget

Applied
[(AQO
x BQI) x BP]

VOH or FOH Rate =$ Budgeted OH BQO
= Budgeted number of units EXPECTED to be made
.0/msohtmlclip1/01/clip_image001.png”> (BQO
x BQI) BQI
= Budgeted quantity of INPUTS for
each units; INPUTS are whatever we use to
“apply”
or “allocate” OH. (Most likely DL hrs or
MHrs.)Chapt
9 Inventory Costing – Focus on Absorption Costing vs Variable Costing
Joan Hill, President of Hill & Hill
Pens, was looking forward to receiving the company’s second quarter income
statement. She knew that the sales
budget of 20,000 units sold had been met during the second quarter and that
this was an increase of 25% over the first quarter sales units. She was happy about the increase in sales,
since Hill & Hill Pens was about to approach its bank for additional loan
money for expansion purposes. She anticipated
the strong second-quarter results would be a real plus in persuading the bank
to extend the additional credit.

For this reason, Joan was shocked when she
saw the first two quarters income statement below. Instead of increasing operating income, there
was a decrease.

Hill
& Hill Pens
Income
Statements
For
the First Two Quarters

First
Quarter

Second
Quarter

Sales

$1,600,000

$2,000,000

-COGS

Beg Inv

$ 210,000

490,000

COGM

1,400,000

980,000

-End Inv

<490,000>

< 70,000>

+/- Adj for
PVV

0

240,000

1,120,000

1,640,000

= Gross margin

$ 480,000

$ 360,000

-Selling &
Admin

Variable

80,000

100,000

Fixed

230,000

230,000

Operating Income

$ 170,000

$ 30,000

Joan was certain there had to be an error
somewhere and immediately called the controller into her office to find the
problem. The controller stated, “The
operating income is correct, Joan. Sales
went up during the second quarter, but the problem is in production. You see, we budgeted to produce 20,000 units
each quarter, but a strike in one of our supplier’s plants forced us to cut
production back to only 14,000 units in the second quarter. That’s what caused the drop in operating
income.”

Joan replied, “I don’t understand
this! I know sales increased, yet you
talk about production to explain the drop in income! What does this have to do with the sales that
we made? If sales go up, then income
ought to go up.”

Budgeted production and sales for the year,
along with actual production and sales for the first two quarters are given
below:

1st
Quarter

2nd Quarter

3rd Quarter

4th
Quarter

Planned
(budgeted) sales

16,000

20,000

20,000

24,000

Actual sales

16,000

20,000

–

–

Planned
(budgeted) production

20,000

20,000

20,000

20,000

Actual
production

20,000

14,000

–

–

The company’s plant is heavily automated,
so fixed manufacturing overhead costs total $800,000 per quarter. Variable manufacturing costs are $30 per
unit. The fixed manufacturing overhead
cost is applied to units at the rate of $40 per unit (based on the budgeted
production shown above ? $800,000/20,000 units = $40 per unit). Any Production Volume Variance is closed
directly to COGS for the quarter.

The company had 3,000 units in inventory at
the start of the first quarter. Variable
selling and administrative expenses are $5 per unit.

Required:
1.
Prepare a variable cost
(contribution format) income statement for the first two quarters.

2.
Explain why the operating
incomes are different.

3.
Explain why the first quarter
has a$ 0 Production Volume Variance
(PVV) and the second quarter has a$240,000
PVV. Why is the $240,000 PVV added to
COGS?

4.
Given that you may need to
consult with owners of small-sized business in the future, what are some of the
advantages and disadvantages of preparing a variable costing method income
statement for them?